Prospective Ruling Request; Volvo Construction Equipment

HQ W546367 December 1, 1999 R:IT:V W546367 ACC CATEGORY: Valuation John P. Donohue, Esq. Donohue and Donohue 232 South Fourth Street Philadelphia, Pennsylvania 19106 RE: Prospective Ruling Request; Volvo Construction Equipment Dear Mr. Donohue: This is in response to your request for a valuation ruling on behalf of your client, Volvo Construction Equipment, North America, Inc. ('VCE"). We regret the delay in responding to your request. We have complied with your request to maintain the confidentiality of the percentage amounts by which the payments in question are calculated. FACTS: VCE imports from its European affiliates construction equipment known as articulated haulers and wheel loaders. The articulated hauler resembles a large dump truck and is designed to move large volumes of earth and rock in heavy construction. The wheel loader is designed to pick up the dirt and rock and dump it into the articulated hauler. In the past, this equipment was fully manufactured by Volvo Articulated Haulers, AB, and by Volvo Wheel Loaders, AB, both of which are located in Sweden, and by Volvo Construction Equipment NV of the Netherlands. These manufacturers, and VCE, are all related parties. VCE has entered into an agreement to import partially finished haulers and wheel loaders, which VCE will complete in the United States using U.S. sourced material and labor. The Agreement recites that the three European manufacturers, collectively referred to as "the Licensor:" is the proprietor of certain designs, development, know-how, trade secrets, and goodwill (hereinafter referred to as 'the Property') related to the manufacture of certain off-the-highway construction equipment (hereinafter referred to as 'the Goods.'). The Agreement further provides that: the licensor wishes to supply to [VCE] said goods in their incomplete, unassembled, unfinished and partially knocked down (hereinafter 'PKO') condition and to complete the manufacture of said Goods in the United States ... with the use of said Property. In Paragraph 7 of the Agreement, VCE agreed to the payment of a price for the unassembled goods, plus a percentage of the "value added ... to the PKO kit" as payment "for the use of the Property transferred." Paragraph 7 of the agreement defined "value added" as: The difference between the price charged by [VCE] to its dealer\customer, and the sum of: a. the transfer price of the kit from the Licensor to [VCE]; and b. the cost of all customs duties, domestic and international freight charges and all other charges incident to the delivery of the kit from the port of entry to the Manufacturer's premises; and c. the cost of all surcharges imposed by the Licensor, or any one "of them, and incurred by [VCE]. Under paragraph 22(c) of the agreement: [S]hould [VCE] fail to comply with any provision of this Agreement, the Licensor may terminate the agreement upon thirty (30) days written notice to [VCE], provided that [VCE] has not corrected such default during the notice period. Your ruling request seeks our opinion as to the dutiability of the importer's payment to the seller of a percentage of the value added to the imported merchandise. ISSUE: The issue presented is whether the payments in question should be included in the transaction value of the imported merchandise. LAW AND ANALYSIS: Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. § 1401a). The preferred basis of appraisement is transaction value, defined as the "price actually paid or payable for the merchandise when sold for exportation to the United States," plus certain enumerated additions thereto, including any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of sale of the imported merchandise for exportation to the United States, and the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller. 19 U.S.C. § 1401 a(b)(1)(D) and (E). However, transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain "test values." 19 U.S.C. § 1401a(b)(2)(B). In the instant case, the buyer, VCE, is related to the sellers of the imported merchandise. No information regarding the acceptability of transaction value has been submitted; accordingly, we do not address this issue. Nevertheless, assuming the appraising officer determines that transaction value is the applicable basis of appraisement, the following constitutes our position in respect of the payments in question. As a general matter, all payments made by the buyer to the seller are presumed to be part of the price actually paid or payable. Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990). However, this presumption may be rebutted by evidence which clearly establishes that the payments are totally unrelated to the imported merchandise. In Chrysler Corporation v. United States, 17 C. I. T. 1049 (1993), the Court of International Trade applied the Generra standard and determined that certain shortfall and Special Application fees which the buyer paid to the seller were not a component of the price actually paid or payable for the imported merchandise. Instead, the court found that the evidence established that the fees were independent and unrelated costs which were assessed because the buyer failed to purchase other products from the seller, and were not a component of the price of the imported engines. In regard to the dutiability of royalty payments, the Statement of Administrative Action (SAA), which forms part of the legislative history of the TAA, provides in pertinent part: Additions for royalties and license fees will be limited to those that the buyer is required to pay, directly or indirectly, as a condition of sale of the imported merchandise for exportation to the United States. In this regard, royalties and license fees for patents covering processes to manufacture the imported merchandise will generally be dutiable . . . . However. the dutiable status of royalties and license fees paid by the buyer must be determined on a case-by-case basis and will ultimately depend on: (i) whether the buyer was required to pay them as a condition of sale of the imported merchandise for exportation to the United States; and (ii) to whom and under what circumstances they were paid .... [A]n addition will be made for any royalty or license fee paid by the buyer to the seller, unless the buyer can establish that such payment is distinct from the price actually paid or payable for the imported merchandise, and was not a condition of the sale of the imported merchandise for exportation to the United States. Statement of Administrative Action, H. R. Doc. No. 153, 96 Cong., 1st Sess., reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 48-49. Thus, under the TAA, any royalty paid by the buyer to the seller will be included in transaction value unless the buyer can establish that the payment is distinct from the price actually paid or payable and not a condition of the sale for exportation to the U.S. In the General Notice, "Dutiability of Royalty Payments," 27:6 Cust. B. & Dec. 1 (February 10, 1993), commonly known as "Hasbro II," Customs articulated three factors, based on prior court decisions, for determining whether a royalty was dutiable. These factors were whether: 1) the imported merchandise was manufactured under patent; 2) the royalty was involved in the production or sale of the imported merchandise; and 3) the importer could buy the product without paying the fee. Affirmative responses to factors one and two and a negative response to factor three would indicate that the payments were a condition of sale and, therefore, dutiable as royalty payments. The method of calculating the royalty, e.g., on the resale price of the goods, is not relevant in determining the issue of dutiability. Id. at 12. In analyzing these factors, Customs, in more recent rulings, has taken into account certain considerations which flow from the language set forth in the SAA. These include, but are not limited to: (i) the type of intellectual property rights at issue (e.g., patents covering processes to manufacture the imported merchandise will generally be dutiable); (ii) to whom the royalty was paid (e.g., payments to the seller or a party related to the seller are more likely to be dutiable than are payments to an unrelated third party); (iii) whether the purchase of the imported merchandise and the payment of the royalties are inextricably intertwined (e.g., provisions in the same agreement for the purchase of the imported merchandise and the payment of the royalties; license agreements which refer to or provide for the sale of the imported merchandise, or require the buyer's purchase of the merchandise from the seller/licensor; termination of either the purchase or license agreement upon termination of the other, or termination of the purchase agreement due to the failure to pay the royalties); and (iv) payment of the royalties on each and every importation. See HRL 546203, May 21, 1998; HRL 546478, February 11, 1998; HRL 546433, January 9, 1998; and HRL 544991, September 13, 1995 (and cases cited therein). We find that the payments in question should be included in the transaction value as part of the price actually paid or payable for the merchandise. VCE has not rebutted the presumption that these payments, made by this importer directly to the seller, are dutiable. The agreement between the sellers and the importer effectively links these payments to overall payment of the imported parts. For example, under paragraph 22(c) of the agreement, the Licensor may terminate the agreement upon 30 days written notice to VCE, should VCE "fail to comply with any provision of this Agreement." Thus, VCE cannot buy the imported parts without paying the specified percentage of the value added in the United States. VCE's failure to complete the manufacture using the seller's "designs, development, know-how, trade secrets, and goodwill," or VCE's failure to pay the specified percentage of the value added, would result in a termination of the agreement. Our conclusion that these payments are dutiable would not be altered if we were to assume, arguendo, that the payments in question are an addition to the price paid or payable as a royalty or license fee. The Agreement indicates that the merchandise transferred to VCE, including the finished products that VCE would complete and sell in the United States, are under patents owned by the Licensor. VCE makes these payments directly to the sellers and their related parties. The royalty is involved in the production of the merchandise occurring in the United States, and the importer cannot buy the product without paying this fee. We also note that the payments of a percentage of the value added after importation might also dutiable as the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller. Nonetheless, in view of our finding that the payments are dutiable as part of the price paid or payable, or as a royalty or license fee, it is unnecessary to address other possible bases for the dutiability of the payments. We therefore conclude that VCE's payment of a percentage of the value added after importation was a condition of the sale of the unfinished goods for exportation to the United States, and, hence, are dutiable either as part of the price actually paid or payable for the imported merchandise, or as a royalty or license fee. HOLDING: Based on the evidence and the information provided, the fees paid by the importer to the licensor for use of the licensor's designs, development, know-how, trade secrets, and goodwill," are included within the transaction value of the imported merchandise, either as part of the price actually paid or payable under§ 402(b)(1), or as royalties in accordance with§ 402(b)(1)(0). Sincerely, Thomas L. Lobred Chief, Value Branch